Ofwat pricing proposals point to hard times for water firms

According to City big-hitter Morgan Stanley they may have to face up to dwindling profits growth and even dividend cuts as the utilities get to grips with the industry regulator's tough new pricing formulas which will dictate what they can charge consumers. Ofwat is due to unveil its proposals next week and has already indicated they will fall way short of the various operators demands.

The broker has already moved to cut its price targets for their shares in a range of 2% to 26%, having removed any premium it had factored in for regulatory outperformance. It sees United Utilities, 7¾p cheaper at 467½p, and Severn Trent, down 11½p at 993½p, as having the greatest regulatory risk and has set their price targets mid-way between its base and bear cases.

So UU has been slashed from 565p to 420p with an underweight rating, while Severn Trent drops from 1230p to 9045p, also rated at underweight.

Morgan Stanley's top pick remains Pennon, a tad firmer at 474p but it says it would rather own National Grid, 1½p off at 636p, which it rates overweight, as a UK-regulated name. "We do not think enough downside has been priced into the water companies to reflect potential equity issuance and dividend cuts".

Shares generally ticked better as City investors took their lead from Wall Street's positive performance overnight. The FTSE 100 index posted a rise of 10 points at 5355.93.

Once again the price of metals and other commodities are back in fashion with prices again being driven higher. Among the miners platinum producer Lonmin was carried 27p higher to 1710p, while Eurasian Natural Resources added 10p at 901¼p, and Vedanta put on 29p at 2419p.

ITV stood out with a 1.2p rise to 53.1p after appointing former Asda supermarket boss and MP Archie Norman as chairman after an exhaustive search.

AIM-listed Altona Energy surged 1.57p, or 36%, to 5,87p. The Australia-based energy company has signed a binding agreement with the Chinese CNOOC that agrees the terms of their evaluation joint venture agreement.

New York investors endured another volatile session although leading shares eventually posted modest gains. A firmer oil price attracted support for energy companies but overall trading conditions were described as thin. The Dow closed 30.46 higher at 10,437.42.

Tokyo shares were dragged lower by banking on fund-raising worries. The Nikkei 225 Average ended down 53.13 points at 9,676.80.

Japan Airlines fell to its lowest since its 2002 relisting after the country's transport minister denied saying a court-led bankruptcy for the troubled airline was impossible.

Hong Kong shares weakened after hitting 23,000 for a second day. The Hang Seng index fell 160.16 points to 22,753.99. HSBC fell 1.72% as investors pocketed recent gains. Other lenders also fell. Bank of China slid 1.42% and China Construction Bank lost 1.08%.